The Cleveland Financial Stress Index: A Tool for Monitoring Financial Stability

The CFSI is designed to track distress in the U.S. financial system on a continuous basis. Continuous monitoring gives financial-system supervisors the ability to monitor stressful episodes as they are building. Such early detection is important because financial stress can quickly be amplified when stress is occurring in more than one market.

Constructing the CFSI

The CFSI combines 16 measures of conditions in 6 major types of financial markets: credit, equity, foreign exchange, funding, real estate, and securitization. These 16 measures are described in table 1.

Table 1. Cleveland Financial Stress Index Components

Markets

Component

Description

Credit Covered Interest Spread Measures uncertainty about government bond markets.
Corporate Bond Spread Measures the broad perceptions of medium- to long-term risk in corporations of all sectors.
Liquidity Spread Measures changes in the bid and ask prices on three-month Treasury bills, which reflects liquidity in financial markets.
Commercial Paper and T-bill Spread Measures the short-term risk premium on financial companies’ debt.
Treasury Yield Curve Spread Measures the likelihood of recession because it captures long-term uncertainty and short-term liquidity.
Equity Stock Market Crashes Measures the extent to which equity values in the S&P 500 financial Index have dropped over the previous year. It also captures expectations about the future of the banking industry.
Foreign exchange Weighted Dollar Crashes Measures flight from the U.S. dollar toward a broad set of foreign currencies.
Funding Financial Beta Measures the contribution of the banking sector to overall stock market volatility
Bank Bond Spread Measures the broad perceptions of medium- to long-term risk in banks issuing A-rated bonds.
Interbank Liquidity Spread Measures the perception of counterparty risk in interbank lending.
Interbank Cost of Borrowing Measures the degree of apprehension with which banks loan to one another.
Real Estate Commercial Real Estate Measures the risk associated with investing in commercial real estate.
Residential Real Estate Measures the risk associated with investing in residential real estate.
Securitization Residential MBS Measures the ability of agencies to raise capital and relative riskiness of the securitized asset.
Commercial MBS Measures the ability of originators to raise capital and relative riskiness of the securitized asset.
Asset-Backed Securities Measures the ability of originators to raise capital and relative riskiness of the securitized asset.